International Financial Management - Essay Example

INTERNATIONAL FINANCIAL MANAGEMENT REPORT Globalization is an emerging trend in the 21st century since many companies want to expand their operations into multinational entities to leverage from the benefits that come along globalization. Globalization presents a number of benefits and opportunities to business firms since they can expand their operations to tap new markets in unexploited business territories across the world (Omeara, Mehlinger & Krain, 2000). Therefore, for firms to be positively embraced by clients across national borders they need to undertake extensive marketing and advertisement campaigns so as to make their presence known to the new markets which they intend to exploit, normally this is the most difficult phase of globalization since business firms can invest millions of dollars into this particular initiative only for them to fail (Ervin & Smith, 2008). Thus, the management of firms needs to undertake due diligence examinations of the markets, which they intend to roll out their operations and analyse the probability of success as well as that of failure before they can undertake the costly process of global advertisement (Weinstein, 2005). However, with the correct advertisement and marketing techniques in new markets foreign products are normally positively embraced in foreign markets as compared to local products as the consumers perceive anything foreign to be superior in both quantity and quality (Osterhammel & Petersson, 2005). Before the process of advertisement in the new markets can commence, the top management officials of the company should be prepared to encounter a number of problems with governments of prospective new markets. Some of the inherent problems that the company should be prepared to face if they opt to expand to Argentina are elaborated below. Potential Problems between Underhand and the Government of Argentina Politics Multinational corporations are usually identified with a single country but their profits and growth depend on political conditions and political jurisdictions of the host countries, rather than their home countries. In this regard, politics of a particular country are a critical factor that has far reaching effects on Multinational corporations. Politics of any country play a key role in shaping commercial systems and they can impact on MNCs in both positive and adverse ways in business terms (Zhang, 2014). In this respect, it is unlikely for multinational corporations such as Underhand Plc to be indifferent to the politics of countries where they currently operates and the prospective countries. The atmosphere and long-time trend of Argentine politics will in particular pose numerous politics incidental problems to Underhand and the company might eventually be compelled to assume a role in Argentine politics to conform with other MNCs in the country. In the recent past, Multinational corporations in Argentina have directly been involved in politics including lobbying the congress in order to push favourable policies such as more liberal tariffs (Hall, 2012).It may not be in the best interest of Underhand to engage in Argentine politics given the inherent drawbacks but it is a norm that the company will have adopt for survival and growth. Trade balance There is no doubt that Underhand plc. has a conducive environment in Morocco and to some extent China as far as trade balance is concerned. Morocco and most developing countries in Africa are in bid to lure investors and this regard rules on trade balance are structured in a friendly manner so as not to deter investors. Underhand plc. may choose to remit overseas all its profits generated in Morocco without necessarily contravening any laid down policies. Things are however quite different in Argentina. In the recent years, the government has intensified formal and informal controls over MNCs so that they reinvest in the country (Forbes, 2014).The management of Underhand must brace itself to cope with a government that has always accused multinational corporations of exploiting locals by remitting their profits overseas. Precisely, Underhand risks to be a hostage by expanding to Argentina given the country’s policies that seek to force MNCs to reinvest. In addition, Argentina’s government has enforced protectionist policies in bid to substitute imports with locally produced goods. The policies require importers to obtain licenses, which are not automatically renewable, from the government (Hall, 2012).In this regard, Underhand must be prepared to cope with these strict import policies that are not present in Morocco or China. Apparently, it is easier to export than import in Argentina. Tax Every country has its own distinct tax regime. Underhand will pay more corporate taxes in Argentina than it is currently paying in China and Morocco. Corporate tax rate in Argentina is 35% while the rates stand at 25% and 30% in China and Morocco respectively. In addition, the management should be prepared to adopt to the Argentine recently revised transfer pricing methodologies that are quite distinct from China’s and Morocco’s (Heritage.org, 2014). Non-compliance with tax regime in Argentina, and it should also be the case in China and Morocco, is perilous yet the issue could possibly arise as a foreign company orients itself to the tax exigencies of a particular country. Employment The health of relations between a multinational corporation and the host country is largely determined by how much the MNC can potentially contribute to alleviate the employment levels in the host country (Vaidya, 2006). The same case will apply between Underhand and Argentina’s government. Underhand plc. Must be equipped to hire substantial number of locals to its workforce including top management. Argentine, like many other countries, has policies that set the ability of foreign companies’ capacity to create employment for locals as a precondition for the foreign company’s admissibility for investment in the country. Environment Another potential area of conflict between Underhand and Argentine government will be matters pertaining environment. Each government has its unique environmental regulations that impacts on both local and foreign companies in different ways. The strictness of the regulations pose non-compliance risk and the latter jeopardizes the company’s relations with the host country (Pang, 2006). With respect to multinationals like Underhand, no government will allow its country to become a hub for environmentally hazardous products or manufacturing processes. Argentine government is very vigilant on environmental matters in regards to multinational corporations that wish to exploit the Argentine market (Heritage.org, 2014). The bottom line is whether Underhand plc. seeks to expand to other countries in a scheme to neutralize a history of non-compliance or low environmental standards of both its products and manufacturing processes in Morocco and China. If this is the case, then a conflict looms between the company and the almost autocratic Argentine government that will never compromise its environmental standards policies to lure multinationals corporations. Economic development As stated earlier, the government of Argentina has enforced several protectionist policies that are geared towards empowering local Argentines at the expense of foreign companies. In this regard, the government is concerned with how multinationals impact on local research and development. The fact that the latter is an expensive undertaking may not be appealing to multinational investors. Further, there is no guarantee that a multinational like Underhand by the virtue of investing in research and development in Argentina will necessarily yield economic benefits to the company even as it empowers the local institutions (Lechner, 2009). In short, it might not be in the best interest of Underhand to invest in research and development in Argentina regardless of the government’s high expectations for multinationals to venture in this particular area. The same vein applies to investment in technology. Such divergent view-points could turn problematic as far as the relations between underhand and Argentine government are concerned. Finance Argentina’s like many other countries in Latin America have adjusted its interest rates to cope with inflation and other pressures in the global market (Forbes, 2014).Upward adjustment of interest rates could have a positive impact on multinationals like Underhand .However, this is subject to whether the MNC is reliant on the host country’s capital markets for raising its finances or it raises funds from abroad. In the former case, variation of interest rates could be problematic to the MNC (Day & Masciulli, 2007). Ethics of globalization Despite firms aspiring to tap into the global markets there are a lot of ethical issues that surround the whole idea of globalization. Thus, business firms need first to evaluate these issues and provide formidable mechanism on how they are going to deal with them so as to avoid ethical dilemmas in their operations in future (Commers, Vandekerckhove & Verlinden, 2008). The major ethical issue that is often associated with the concept of globalization is the issues of the large numbers of jobs that are left in jeopardy in developed countries as firms are seeking cheaper labour force alternatives in less developed nations (Vaidya, 2006). It is worth noting that white collar jobs or professional employees like engineers or accountants are often retained by the companies even if they are opting to globalize their operations however, casual labour employees in developed countries are deemed to lose their jobs in preference of similar employees from less developed countries who offer a cheap alternative (Day & Masciulli, 2007). The ethical morality of this action which is rampant among many multinational companies has been questions with elaborate measure being installed to ensure the issue of job cut in developed nations with the hope of obtaining a cheaper alternative in developing nations is under serious debate with deliberations set to be made soon (Keskitalo, 2008; Singer, 2004). Brain drain is yet another serious concern as far as ethics of globalization is concern. Often multinationals or companies that have global affiliations tend to poach bright professions or students in their final years in college and take them to overseas colleges for further studies and later absorb them in their companies(Weinstein, 2005). This has been so serious to the extent that developing countries are running short of professionals in critical sectors such as; health, finance, accounting and engineering (Jones, 2010). This is because global multinationals have poached the bright students who could have formed the elite labour force for the country with the promise of better terms of service. In the long run, less developed countries will remain behind both in terms of infrastructural development and innovations due to the absence of skilled manpower to steer economic development (Lechner, 2009). Firms in these countries will not be able to be competitive in the global front since they lack professionals to come up with strategic policies that will enable them to be more competitive like their counterparts (Blanpain & Auer, 2005). Thus, as much as firms will be poaching the bright minds from less developed countries they should come up with initiatives aimed at alleviating the educational sectors in those countries to ensure more bright students get access to quality education so as they can form a pool of professional for the local firms too (Keskitalo, 2008). Another ethical issue concerning globalization that has been raised over the years is the over-exploitation of resources in less developed countries by multinationals while still preserving their resources back in their countries (Weinstein, 2005). Since a number of less developed countries have not legislated elaborate policies concerning their natural resources unscrupulous multinationals come with shoddy deal, which they use to overexploit the resources of these countries while leaving behind the same resources in their parent countries due to strict policies that govern them (Baldwin & Winters, 2004). The issues has raised serious questions of whether multinationals investing in third world countries are doing business with utmost good faith or they are just out to exploit these countries due to lack of favourable rules and regulations to govern natural resources (Pang, 2006). For instance, the forest reserves in West Africa and some parts of Brazil have been exploited by international companies hence the issue of climate change is negatively impacting on these nations and they are incurring large losses since agriculture which is the basic economic activity for most of them is no longer thriving well under those climatic conditions (Lechner, 2009; Homann, Koslowski & Luetge, 2007). Health concerns have also been raised as part of the ethical issues surrounding globalization. It has been observed that foreign companies use less developed countries like Morocco as the dumping site for environmental pollutants (Attawell, George & Page, 2004). For instance, the companies they come to the nation they invest in terms of setting up manufacturing plants. They over-exploit the resources of that country and in the process of manufacturing they will be emitting poisonous gages including greenhouse gases to the atmosphere (Jones, 2010). Those notwithstanding the residue that result from the process of producing are dumped in the environment leading to environmental degradation issues. This acts will in the long run affect the health of the locals and in most cases the finished products are exported to foreign countries where the market of the goods in on high demand (Vaidya, 2006). Finally, the issues of financial interdependence among nations that result to globalization have negative effects to other countries in the event that one of the partner countries goes into an economic crunch. What normally happens is that the rest of the partnering countries will also sink into financial depression (Ervin & Smith, 2008). This is not really viable as financial analyst are lobbying for the legislation of policies that protects individual countries from suffering financial crisis that hits other countries since despite the interdependence each and every country is dependent on its own (Jones,2010). Discontent that the Directors may Face over the Increase in Globalization The directors in their bid to roll out a global advertisement campaign to market their firms and products at the same time will likely to face a lot of discontent over the rise and increase in globalization over the years (Pang, 2006). To begin with globalization has led to over-standardization of products in the global market. Products that are financially viable in the global market need to meet certain standards that have been set as a result of the intense competition which is evident among global firms. This has led to barriers being set for small or local firms that seek to be incorporated in the global market (Weinstein, 2005). The reason being the standards that have been set by giant multinationals are too high to be achieved by small firms that seek to tap into the international firm since they do not enjoy the economies of scale that the established multinationals do(Ervin & Smith, 2008). Thus, the playground in the global front will not be equal, and this will act as a barrier to small firms being globalized. Multinationals that have established themselves in the global market for years have acquired power and influence in the economy since they are able to hop from one economic territory to the next depending on the conditions that are inherent at that particular time. This will ensure they will shift operations to areas where they perceive favourable economic regime thus they will in the long run not be affected by economic crunches or unfavourable economic regulations that may be implemented in some nations (Pang, 2006). It is an advantage over its counterparts who have to maintain operations in adverse economic conditions as they wait for the situation to prevail. In the process, they will be incurring losses as some may opt-out of business since they cannot financially sustain those losses (Ervin & Smith, 2008). Increased inequality is yet another discontent that directors are set to encounter due to increased globalization. It is prudent to say globalization is an economic mechanism that enabled rich business firm’s nations to expand and become successful at the expense of their poor counterparts (Pang, 2006). Globalization presents a perfect opportunity for firms that enjoy massive economies of scale to leverage from the vast market and global resources that are untapped and thus make a killing out of it (Lewis, 2007; Welfens, 2001). This will increase their revenue as they will be exposed to cheap labour force, more resources, which are ideally cheaper and not forgetting wider market for their goods. The firms that have the potential to leverage from these opportunities will prosper financially while the lesser firms that are unable to exploit these opportunities will remain financially unstable and even may further suffer as all opportunities will have been grabbed by the giants since they cannot compete with them on a similar market front (Pang, 2006). Increased globalization is often associated with the increase in deindustrialization. Since globalization presents a platform whereby international firms compete on a global market place the local firm is various countries will be forced to close business since they will not have the capacity to compete with multinational that will infiltrate the local market with superior goods (Weinstein, 2005). The multinational enjoys economies of scale hence they can invest in technology and innovation in their production to come up with superior quality goods. This will not be the case with local firms that operate on a tight budget thus cannot invest in sophisticated technology in their production process (Khosrowpour, 2000; Schultz, 2010). The consumers will prefer the superior goods over the other and thus the local firms will not have market for their goods leading them to close business eventually. Thus the directors will be concerned with this issue of whether after investing substantial amount of money on advertisement on a bid to go global the firm will later be faced with the issue of deindustrialization (Weinstein, 2005). Bibliography Attawell, K., George, V., & Page, R. M., 2004. Global Social Problems. Cambridge, Polity. Baldwin, R. E., & Winters, L. A., 2004. Challenges To Globalization Analyzing The Economics. Chicago, University Of Chicago Press. Available At Http://Site.Ebrary.Com/Id/10210027 [Accessed 23 Nov. 2014]. Blanpain, R., & Auer, P., 2005. Confronting Globalization: The Quest For A Social Agenda, Geneva Lectures. 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